In a case closely watched nationwide, the Iowa Supreme Court last Friday, July 11, affirmed a lower court decision allowing the use of power purchase agreements (PPAs) to finance the installation of photovoltaic (PV) solar energy facilities. SZ Enterprises, Inc., d/b/a Eagle Point Solar v. Iowa Utilities Board (IUB), a Division of the Department of Commerce, State of Iowa, Iowa Supreme Court No. 13-0642 (July 11, 2014). Because of the significant upfront cost of installation of solar panels on residences and businesses, solar energy providers commonly absorb the upfront installation cost and recoup their investment through sale of the electricity produced by the panels under a long term PPA.  The PPAs commonly provide for fixed rates per kilowatt-hour (kWh), with modest escalation over the term of the agreement, typically 20 or more years. Such agreements benefit the consumer by avoiding the upfront cost of the panels and installation, and by fixing electric rates over the long term. They benefit the solar energy companies by providing a long term cash flow from the upfront investment.  The rub is that in some states, including Georgia, electric utilities take the position that PPAs are illegal under so-called territorial acts, under which utilities are established as government-sponsored monopolies for the retail sale to the public of electricity within their assigned territories.

The dispute in Eagle Point pitted a solar energy company and its customer against Iowa public utilities and the Iowa Utilities Board (IUB) (the commission that regulates public utilities in Iowa).  The Iowa Supreme Court analyzed whether the installation on the customer’s side of its electric meter (a “behind-the-meter” installation) of solar panels to generate electricity for purchase by the customer conferred the status of “public utility” on the solar energy company, thereby subjecting it to the monopolistic territorial restrictions applicable to public utilities.  Its ruling that the behind-the-meter installation and operation of the solar panels and sale of electricity to the customer does not cause the solar energy company to be a public utility, and therefore is permissible under Iowa law, could influence the interpretation of similar territorial restrictions in other states.  The Iowa Supreme Court’s decision can be found here [http://statecasefiles.justia.com/documents/iowa/supreme-court/2014-130642.pdf?ts=1405199423].

By approving the use of PPAs to finance solar energy systems as not subject to territorial restrictions or regulation by the IUB, the Iowa Supreme Court agreed with regulatory decisions in several other states that have approved the use of PPAs and similar agreements to finance and operate solar energy projects and sell the electricity to the customer (Arizona, Nevada, New Mexico, Oregon).

The Iowa Supreme Court evaluated the issue under Iowa’s statute that defined “public utility” in the electricity context as any entity “owning or operating any facilities for … furnishing… electricity to the public for compensation.”  The Court interprets “to the public” to mean “to sufficient of the public” to “clothe the operation with a public interest”.  This does not mean that whenever an entity sells electricity on a per kWh basis it is a public utility.  The Court evaluated eight factors to determine whether a PPA financing arrangement for solar energy constitutes sale of electricity to “sufficient of the public” to clothe it with a public interest:

1. Consideration of what the company actually does. This requires a pragmatic assessment of what is actually occurring in the transaction.  The Court considered the PPA to be an arms-length transaction between a willing buyer and a willing seller with no unusual potential for abuse. The Court noted that the IUB did not consider leasing of solar panels to create a public utility so that the provision of electricity was not the determinative factor. The differentiation was between two different methods of financing—not a topic for regulation as a public utility.
2. Dedication to public use:  it cannot be said that the rooftop solar panels were dedicated to public use—no more than thermal windows and insulation in the building itself. The transaction is a private transaction between the customer and the solar provider.
3. Articles of Incorporation, authorization, and purposes of the company. This factor was inconclusive.
4. Whether the activity is dealing with the service of a commodity in which the public has generally been held to have an interest. Provision of onsite solar energy is not a service that cries out for public regulation. Customers remain connected to the grid, so if the solar system fails, no one goes without electricity. Behind-the-meter solar equipment is not an essential commodity required by all members of the public.
5. Monopolizing or attempting to monopolize the territory with a public service commodity.  No evidence suggests that the solar provider was seeking to become a monopoly, or close to achieving a monopoly.  The nature of the transaction suggests the opposite—the customer owes nothing unless the solar panels produce electricity.
6. Ability to accept all requests for service:  the solar provider is not providing a fungible product that all members of the public can tap into.
7. Ability to discriminate in providing service among members of the public:  the solar provider can decide not to serve any particular member of the public, and if it does, that member of the public can still get electricity from the grid.
8. Actual or potential competition with other entities that are clothed with the public interest:  the Court acknowledged the appeal of the “cream-skimming argument—that if solar providers are allowed to cherry-pick a utility’s largest customers, it would have a financial impact on the utility’s ability to provide electric service to the public.  However, the Court saw no evidence of such negative impacts in states that allow PPAs — California, Arizona, Nevada, and Colorado.  Solar providers do not seek to replace electric utilities, but only to reduce demand.  Also, the ability to structure the transaction as a lease that would remove any argument that the behind-the-meter solar installation was illegal indicates that whatever negative effects that might occur could occur anyway.  The Court also noted positive impacts of solar energy—production of electricity during peak energy demand when the grid-produced electricity is under the most stress; meeting the goals of electric utilities to increase efficiency and reduce demand—offset the claimed negative impacts.

After evaluating the eight factors, the Court determined that the solar provider in a behind-the-meter PPA is not a public utility and that therefore the exclusive territorial provisions applicable Eagle Point Solar to public utilities did not prevent the solar provider from selling electricity from the solar panels on a per-kWh basis to its customer.

For further information on the IUB or solar energy, contact Steve O’Day.